NY's Top Court Throws Out Wide Use of Rent Penalty on Landlords

New York’s Court of Appeals—which has the last word on all court cases in the Empire State—has tossed out a 2021 NY Supreme Court ruling that sided with tenants in a rent control case that significantly widened the use of a punitive default rent formula against landlords, forcing them to restore the lowest regulated rent rates in their buildings.

The tenants had accused landlord William Koeppel, owner of a 137-unit East Side apartment building, of “fraudulently” recalculating stabilized rents in 2011 and 2012 while he was collecting J-51 tax abatements on the property.

The Court of Appeals said the earlier ruling—which reduced rents in the affected apartments by 60% and bankrupted Koeppel, who has been unable to collect any rent from a large number of tenants in the past two years—had “misinterpreted” the state’s rent control statute in significantly widening the use of the default penalty.

In a decision this week that potentially impacts dozens of J-51 tax abatement cases moving through NY’s court system, the top court restored a much narrower application of the penalty that was established in a 2020 case known as Regina v. DCHR (the agency that regulates rent stabilization).

The Court of Appeals ordered the appointment of a special referee to determine how much rent the tenants now owe Koeppel on their apartments at 350 East 52^nd Street in Manhattan’s Turtle Bay neighborhood—but the ruling does not order the tenants to pay the landlord, nor does it create a mechanism for collecting the back rent.

Koeppel’s attorneys at Rosenberg & Estis told GlobeSt. the landlord is owned “hundreds of thousands of dollars” and it is uncertain whether he’ll be able to avoid foreclosure on the East Side property as a result of the court victory, which they hailed as a legal landmark.

“This is a tremendous result for our client, who has been driven into bankruptcy by an erroneous decision by the Supreme Court that dramatically lowered the rents,” said Jeffrey Turkel, a Rosenberg & Estis Special Counsel who argued the case in the Court of Appeals on a legal team including Rosenberg & Estis attorneys Howard Kingsley and Ethan Cohen.

The case dates back to 2011, when a group of tenants filed a lawsuit alleging Koeppel overcharged on rent while receiving the J-51 property tax break. Raising rents ultimately allowed the landlord to remove some apartments from rent regulation under the old luxury vacancy deregulation rules.

However, the following year, the Court of Appeals decided that certain units couldn’t be removed from regulation, and landlords who had done so could not be retroactively penalized under certain circumstances.

In consultation with the DHCR, Koeppel immediately re-registered all of the apartments and offered tenants new stabilized leases at reduced rents. However, the tenants then filed a class-action lawsuit claiming the landlord fraudulently recalculated the rents and asserting that their rent should be calculated under DHCR’s default rent formula.

Rosenberg & Estis attorneys argued that, under the Regina v DHCR ruling, the default formula could only be used when fraud tainted the reliability of the base rent and suggested a scheme to deregulate the apartments.

Since the base rent was established in 2007 and the recalculation took place in 2011, this was not possible, they argued.

Choosing between the two standards for interpreting when the default formula is imposed—the narrow definition in the Regina case and the wider definition in the 2021 ruling against Koeppel—the Court of Appeals tossed out the broader definition and reestablished the standard set in Regina.